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The 5 Biggest Muni Defaults Ever

For munis, it has been a surprising run. Despite grim predictions of a market collapse — kicked off in late 2010 by celebrity analyst Meredith Whitney — the overall number of defaults has been falling. Municipal-bond funds, meanwhile, have gone on to post market-beating returns, even as many stock funds floundered.

Christopher Parypa /

But even fans of muni bonds acknowledge that some cracks are starting to show. Exhibit A: So-called lease bonds, which are backed by revenue from rental payments on city facilities, are now defaulting at almost 10 times the rate of traditional municipal bonds, according to a recent report in The Wall Street Journal. Experts say many other types of revenue bonds that rely on income from city projects, such as a football stadium or retirement home, are also struggling to keep up with payments.

The problem is two-fold, says Patrick Early, chief municipal analyst for Wells Fargo Advisors: The sluggish economy has made it difficult for many of these projects to generate enough revenue, and issuers of these bonds are limited in what they can do to make up for a shortfall. For instance, a transportation authority can raise a toll to help cover bond payments, but if fewer people drive on the bridge that charges the toll, the fee hike might still not be enough to cover debt. State governments, on the other hand, can take other steps, such as raising taxes or cutting services.

Of course, the great majority of muni-bond issuers — revenue-backed and otherwise — are doing just fine, experts say. Among the types of muni bonds with the fewest defaults: revenue bonds backed by essential service projects like utilities or sewer programs. Bonds issued by state housing agencies, public university bonds and those backed by local sales tax have also had few defaults, says Matt Fabian, managing director for Municipal Market Advisors, a market research firm.

Still, muni-bond bears say there are other risks. Several lawmakers have proposed cutting or eliminating the tax break on income from municipal bonds for high earners to help reduce the federal government’s massive deficit, a move experts say could cause a stampede out of munis. Other Wall Street analysts have predicted the number of “super downgrades” – downgrades of two or more notches – to pick up this year.

Here’s a look at the five biggest muni-defaults of all time, according to the Distressed Debt Securities Newsletter, which tracks defaults. This includes municipal bond issuers that have defaulted on some of their debt, bankruptcies and those using reserves to make payments.



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    • By WebOsPublisher

      I followed the basic procedure to change the icon,but when I go back,the icon has not changed.
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      Hi DianeAntonico,
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      In reply to Divya R post on April 25, 2011
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    • houdini wrote:

      Terrible article – grans statement with no backup. The example to demonstrate that lease payments owed by cities are rising rapidly – two tobacco bonds, an airline bond, a sewer bond caused by criminal behavior by city officials and a 35 year old power operator default. Nothing like making up a theory

      Thank you, my thoughts exactly. Poor headline, no substance!

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